Don't stop now

According to industry data, the creation of new SIP accounts has slowed down in May 2022. The month had the lowest rate of new account creation in the past one year. Clearly, this slowdown is a result of what is politely described as market conditions. The stock markets have been falling for a few months now so investors are less enthusiastic about starting new SIPs. If the past is any pattern then some people will also stop existing SIPs and the longer the bear phase in the market continues, the stronger this trend will become.

Don't do this. Of all the instinctive actions that equity fund investors take, this has to be the most destructive. It's like snatching defeat from the jaws of victory. The entire point of an SIP is to continue investing when the markets are weak. The maths and the psychology of SIPs are both tailor-made to nudge you into continuing to invest, no matter what. Stopping and starting SIPs based on 'market conditions' negates all those advantages. In general, those who have a punter's approach to investing, or spend too much time watching the punting channels on TV, carry over that approach to SIPs, trying to stop and start SIPs by timing the markets. Not only does it not work, but it's also counterproductive.

Depending on how bad the markets get, in varying degrees, this phenomenon repeats itself periodically. The basic idea behind SIP is that while the general direction of an equity investment is upwards, it is not possible to reliably predict the actual fluctuations that it may undergo as part of its general trend. Instead of trying to time one's investments, one should regularly invest a constant amount. As time goes by and the investment's NAV or market price fluctuates, this will automatically ensure that when the price was low, you ended up purchasing a larger number of shares or units. Eventually, when you want to redeem your investment, all the units are worth the same price. However, because your SIPs meant that you bought a larger number of units whenever the price was low, your returns are higher than they would have been otherwise. Those are the basics of how it works. However, the investor has to resist sabotaging this. You have to allow it to work by going on investing when the market is low and not trying to time it.

In a way, the psychology of the SIP is more important than the maths. People don't invest regularly and when the media and social media is carrying on 24x7 with exaggerated tales of what a great disaster is looming, then stopping is the easiest decision to make. From this point of view, SIPs are just a psychological trick to make you invest when the market is low without having to guess what it will do next.

In a way, even the price averaging of SIPs does not matter. As a matter of fact, for very long-running SIPs the price averaging has only a minimal impact. Instead, SIPs solve the real problem in investing, which is to not stop investing but to go on steadily. Without this, savers invest in fits and start and then stop investing when equity markets fall, often because falling equity prices are presented as a crisis in the media. But this makes no sense at all. As a buyer of anything, you should want low prices. So should you as a buyer of equity or equity mutual funds. If you follow your instincts, then you will end up routinely buying high and selling low, which is the exact opposite of what you should be doing.

There are two goals of SIP investments: One, to ensure that you keep investing regularly. And two, that you do not stop investing when the markets are shaky. To generate great returns, both are equally necessary. Don't sabotage your investments by not sticking to the plan.

Suggested read: The illusory SIP